In the light of various incidents involving issues related with insider trading and fraudulent trade practises in the securities market and increasing role of technology, SEBI had constituted a committee on Fair Market Conduct under the Chairmanship of Shri T.K. Viswanathan. In August 2018, the Committee submitted its report suggesting several amendments to inter alia the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations).
Acting upon the recommendations of the Committee, SEBI has now notified several amendments to the PIT Regulations which will come into effect from April 01, 2019. Some of these are discussed below:
Communication of UPSI
Regulation 3 prohibits communication, allowing access to and procurement of unpublished price sensitive information (UPSI). However, communication done for ‘legitimate purpose’ is permitted. The new amendment has provided an indicative meaning to the term and provides that information shared in the ordinary course of business with customers, lenders, auditors, etc. will be covered under the term legitimate purpose. Besides this, the listed entities are also required to make a policy on the determination of legitimate purpose.
Trading while in possession of UPSI
Regulation 4 prohibits an insider from trading in securities while in possession of UPSI. The new amendment has added an explanation to this clause which states that all trades undertaken while in possession of UPSI will be presumed to be ‘motivated’ by UPSI. Earlier, under the 1992 PIT Regulations, insider trading ‘on the basis of’ UPSI was prohibited (till the provision was amended in 2002). It seems that by way of this explanation, the intent behind the earlier provision has been brought back.
Besides this, certain additional defences have been added to Regulation 4 to bring consistency with international laws and incorporate various clauses provided under the guidance note which was issued in 2016 by SEBI. These include: extension on the exemption of inter se transfer to all ‘insiders’, the exercise of stock options, and transactions carried pursuant to statutory or regulatory obligations.
Code of Conduct
Regulation 9 provides that a code of conduct is to be formed by all persons who deal with UPSI. This provision has now been amended and it is now provided that listed entities, intermediaries and fiduciaries (including auditors, accountancy firms, law firms, consultants, banks, etc.) are required to separately form such code. In fact, listed entities which are also SEBI-registered intermediaries are required to form two separate codes.
Designated Persons
Designated Persons are such persons who are privy to UPSI on the basis of their role and function and are designated as such. An indicative list of designated persons has been provided and it will now include: (i) promoters of listed entity, (ii) employees of material subsidiaries of listed entity, (iii) designated persons, CEO, employees up to two-levels below CEO, and support staff (such as, IT and secretarial staff) of – listed entity, intermediaries and fiduciaries.
Besides this, all designated persons will now be required to disclose their material financial relationships which refers to receipt of certain money by way of loan / gift, during immediately preceding 12 months which is at least 25% of the payer’s annual income. However, all transactions done on arms’ length basis will not be considered as material financial relationships. Although PIT Regulations does not define “arms’ length relationship”, however, in accordance with Regulation 2(2) the meaning of the term can be attributed from Section 188(1) of the Companies Act, 2013, which states that transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest, is an arm’s length transaction.
Other major changes for listed entities
Information forming a part of the material disclosure list under Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 will not be considered as deemed UPSI anymore. This change is made with a view to differentiate between ‘material’ and price sensitive information, as every material information such as, vesting of ESOPs, may not be price sensitive.
Besides the above stated amendments, listed entities are now required to mandatorily formulate a whistle blower policy. The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 already provides for maintaining a mechanism for whistle blowers. All such policies will now have to be modified to include whistle blowing on matters connected with UPSI.
Similarly, the listed entities are now required to formulate an internal control system wherein a digital database containing details of designated persons, UPSI, persons having access to various UPSI, etc. is maintained. Further, a confidentiality agreement is to be executed with all such persons with whom the UPSI is shared.
Additionally, the listed entities are also required to form additional policies on: (i) how and when people will be brought ‘inside’ on sensitive matters, (ii) the manner in which any leakage of UPSI will be dealt with by the listed entity.
Our View
In our view, while many of the changes bring subtleties and improvements in terms of the distinction between listed entities and intermediaries. However, the amendments can also be seen as an outsourcing of enforcement by SEBI to listed companies and intermediaries. This is troublesome because it will increase cost of compliance and also cause a large chilling effect on genuine corporate communication for the fear that some of it may be mis-used. This would have an adverse effect on the effectiveness of management.
